Long Term Investing in a Volatile World

The global economy has experienced a flurry of economic news recently, including U.S. interest rate increase expectations, Greece debt, and volatility in China. In the short term, the news of these events can cause the financial markets to react sharply. Financial markets in the short term are sensitive to uncertainty, causing volatility. As we elongate the time horizon, and stretch the financial forecasts and models to longer term, e.g. 3 – 5 years, this reduces the volatility. Economic news and short term reactions are a normal part of the global economic landscape. When viewed in short time horizons, the markets appear volatile.

Portfolio management and construction has a long-term focus. As we look back over a 5 year time period, short term fluctuations normalize and asset prices regress to their mean. As managers, we make adjustments in the short term, known as tactical allocations. However, the long-term focus is the hallmark of sound portfolio management. In maintaining a long-term focus, it allows a disciplined manager to avoid being swayed by short-term movements, which typically do not significantly impact long-term returns.

Greece is experiencing a financial crisis. However, Greece is less than 2% of the Eurozone’s GDP, and hence European equities remain attractive as a whole despite the issues in Greece. China equities have dropped recently, however, there has been a recent rebound in the three year trailing (annualized) returns. Short term volatility has happened throughout the history of the financial markets, and will continue to occur. As we stretch the time horizon, the short-term volatility is less significant.